Apple’s Pricey iPhone X Will Turn off A Lot of Users, Make Piles of Money, Says Maxim

Apple's iPhone X, which goes on sale in late October starting at $999 and costing $1,149 at the top end, is way too expensive for some buyers, says Maxim Group's Nehal Chokshi, but he still thinks Apple will make even more money than he'd previously modeled by making more revenue off each unit it manages to sell, at a higher profit margin.

By

Tiernan Ray

Sept. 14, 2017 10:35 a.m. ET

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The Street continues to come up with new models to account for Apple’s (AAPL) pricing of the “iPhone X,” revealed on Tuesday, of which the top-end model, with 256 gigabytes of NAND storage, costs $1,149.

While some think this is brilliant, and some think it’s too pricey, Maxim Group’s Nehal Chokshi falls somewhere in between this morning, arguing the phone will lose Apple a lot of customers, but also make the company more money.

Chokshi, who has a Buy rating on Apple shares, raises his price target to $182 from $180, after running a “proprietary survey” to determine the “elasticity” of demand for the iPhone X.

Chokshi found the price of iPhone X is too expensive for many buyers, especially in China:

We had been modeling an inelastic demand response to just a ~$50 price increase to over the iPhone 7 to $700, which assumed an ~40% GM would be maintained on an ~$30 incremental bill of materials associated with the three new features. Based on the price elasticity data from our survey (shown again from our June 19th note, Figure 1 below), we believe the new to iPhone users (especially those in Greater China) will find the iPhone X pricing ($350 more than iPhone 7 a year ago) to be well above their level of willingness to pay. Thus our FY18 25% reduction in Greater China iPhone unit sales and 8% reduction in non-Greater China corresponds (see Figure 2 below) to the % of users from our survey work that indicated price sensitivity to anything less than a $240 price increase, whereas we previously assumed only a $50 price increase and assumed those that indicated sensitivity at that level were low end iPhone users that would not experience a price increase.

Chokshi cuts his total estimate for fiscal 2018 unit sales of iPhone to 247.75 million units from a prior 283.94 million units. But higher pricing means Apple will make even more than he’d been figuring, at $194.3 billion in revenue off iPhone, up fro ap prior estimate for 193.2 billion.

"The net result is that our FY18 revenue estimate is largely unchanged,” he writes..

This is very good for profit, he thinks: "However, given our expectation that the iPhone X likely carries only an additional $20 to $30 of bill of materials relative to the iPhone 8, we expect the iPhone GM to increase from ~43.5% in FY17 to 47.8% in FY18E, thus driving our overall GM estimate for FY18 from 38.4% to 41.9%."

"The result is that we are significantly raising our FY18 EPS estimate to $13.29, from $11.75, 22% above the FY18 consensus estimate of $10.90."

Chokshi also offers his opinion on Apple’s “3-D sensing” cameras, the “True Depth” camera, opining that it gives Apple “at least a six-month lead” relative to all the companies using Alphabet’s (GOOGL) Google’s Android:

Based on our discussions with various industry contacts, we believe the key IP covering AAPL's Face ID is; (1) system level integration of IR lasers, sensors and optical elements to create a 3D facial image, and (2) software (see patents I, II, III, IV & V) that melds machine learning algorithms with face detection technology to ensure a very high level of personal security. Given the different centers of development for the hardware and software for the Android camp to replicate Face ID, we see likely potential for AAPL's Face ID to remain superior to alternatives that we expect to arrive to end consumers in the next 6 to 12 months. As such, included in our increased sustained gross profit per average iPhone user is our expectation that the pricing of the iPhone X will be eroded by $100 to a $900 starting price point next year due to Android based competitors largely replicating the Face ID functionality enabled by an IR depth sensing module. The net result, as shown in Figure 4 above is that we are slightly increasing our normalized earnings power to $11.37 from $11.17.

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